Expanding Financial Services in Kenya: Agency Banking versus Mobile Banking
Wednesday, 22 June 2011
Three Kenyan banks have begun to roll out agency banking services, expanding access to retail banking services through branchless banking. Effectively following the lead of mobile money service M-PESA, this is also likely to increase the competition with mobile money providers. By Rachel Keeler.

Mobile Money Led the Way
As recently as 2009, just 23% of Kenyan adults had access to formal financial services. Financial inclusion has risen in recent years, with aggressive expansion by Kenyan banks. Kenya now has 1,072 retail bank branches, up from 534 in 2005. Several factors have driven service expansion: the recovery of the Kenyan economy since 2003, advances in technology that support the administration of a large number of small bank accounts; and the wildfire spread of mobile money services through Safaricom’s M-PESA that created a dual dynamic of both competition and co-operation with the banking sector.

Safaricom, Kenya’s leading mobile phone operator with more than 70% market share, oversees a network of 27,000 M-PESA agents and of the company’s more than 17m subscribers, 13.8m, or 81%, are registered M-PESA users. Customers can send and receive money and make bill payments to hundreds of bill-pay partners in seconds. When M-PESA was launched, there was much speculation as to whether Safaricom would compete directly with banks. So far, there are no plans to transform mobile money into a financial institution: Safaricom provides the infrastructure for M-PESA data, but does not handle any of the cash – this is still held in a trust account. Nor does the company engage in any financial intermediation. To date, M-PESA only provides money transfer services.

However, the pressure for banks is clearly on: Following the 2010 launch of the M-KESHO account, an Equity Bank account that is connected to an M-PESA account, allowing clients to make transfers to and from M-PESA, most banks acknowledge that they have little choice but to seek integration with mobile money. The link up with Equity Bank, the precursor in this integration, offered several advantages: the bank piggybacked on Safaricom’s extensive mobile money agent network, whereas Safaricom can now offer access to savings services to its M-PESA clients. It also draws more cash into the formal financial sector where it is available for intermediation.

Telkom Orange’s mobile money service, Orange Money, has followed suit by partnering with Equity Bank. Orange customers can use their SIM card as a bank account number, which allows them to make deposits and withdrawals and pay bills using the mobile money menu. The customer also receives an Orange Money debit card that grants access to Equity ATMs. The mobile money sector is developing rapidly: Recently, Safaricom entered into a co-operation with Western Union so that M-PESA account holders can receive remittances straight into their mobile money account, and now offers a pre-paid Visa card together with I&M Bank.

More Outreach: New Agency Banking Regulations
In February 2011, the Central Bank of Kenya (CBK) released regulations to govern a new agency banking model. The regulations allow banks to offer services through third party agents approved by the CBK. Agents can be telco outlets, SMEs, retail chains, savings and credit co-operatives (SACCOs), or even ‘dukas’ (cornershops) – essentially any profit-making entity that has been in business for at least 18 months and can afford to fund a float account to facilitate payments.

Kenya Commercial Bank (KCB), Co-operative Bank and Equity Bank, all financial institutions with a large retail footprint, are in the process of rolling out agent banking networks. KCB expects to have 2,000 agents by the end of 2011. Equity Bank has recruited 8,000 agents, with 2,000 in operation. Co-op Bank has already seen its profits increase through partnerships with SACCOs that tap deposit pools in rural areas. Effectively, the agency banking model provides an extension into a market already targeted: Co-op Bank and Equity have both succeeded with business models aimed at low income customers. Up-market banks may follow suit. David Ndome, Head of Agent Banking for KCB, expects competition at the agent level: “We’re doing this to grow and defend our market share,” he said.

Under the CBK regulations, agents can offer a number of banking services, including cash deposits and withdrawals, fund transfers, bill payments, loan payments, payment of benefits and salaries, and collection of account and loan applications. However, agents are limited to cash-only transactions and cannot assess applications. Through KCB’s model, customers are charged KES20 per deposit, which goes to the agent, and KES70 for a withdrawal, split evenly between the bank and the agent.

Technology versus Infrastructure Constraints
The CBK regulations require that agents have secure operating systems capable of carrying out real time transactions, generating an audit trail, and protecting data confidentiality and integrity. This is all driven by technology: Transactions can be made via mobile phone, a point of sale (POS) system, or internet banking, and must be reflected immediately on the bank’s side in the core banking system. Orange Money does this by operating on a shared real-time platform with its agents that allows customers to deposit cash into their Orange Money account and then access it immediately at an Equity branch or ATM. Shared infrastructure protects data integrity, reduces operation costs and keeps transaction fees low.

So far, spotty mobile connectivity and electricity supply in rural areas have not interfered with the real time system. “The GPRS is working very well for us,” says Ndome, “other than a very few pockets in the northern frontier where there is no mobile connectivity.” All transactions are currently conducted via the mobile banking platform, which means no need for a constant power supply. When POS systems are put in place, those will also connect through the mobile network.

Breaking the Mobile Money Mould
At present, most agents only process deposits and withdrawals, which offers minimal value beyond M-PESA. However, banking services that break the mobile money mould are coming soon: Key amongst these may be the collection of loan applications. Mortgage lender Housing Finance recently announced plans to move into agency banking as a way to increase deposits bring interest rates down and sell home financing services in rural areas.
John Staley, Director of Mobile Banking and Payment Innovations for Equity Bank, says that Equity plans to grant loans to customers through agents, without requiring any face-time in an Equity branch. This will be done through statistics-based credit scoring. Banks determine scores based on a customer’s transaction and saving patterns over time and a bit of demographic information, with small loans given first that can be stepped up as repayment habits are established. On top of this evaluation, banks can look to the agents themselves for knowledge of their customers’ credit worthiness. Many businesses in Kenya already operate on an informal credit system that allows return clients to purchase now and pay later. Equity has already pre-scored two million of its customers.
An equally important question is how the relationship between agent banking and mobile money will evolve, and whether these models will continue to multiply financial services across income levels.
Staley argues that true financial inclusion will require cheaper transaction costs: For someone earning KES175 a day (roughly the equivalent of USD2, now the low end of the middle class according to the World Bank), KCB’s KES70 withdrawal charge could be prohibitive. However, M-PESA has managed to reach 14m Kenyans with a KES35 transaction charge. This is in part because wealthier (often urban) customers tend to cover those charges when sending money to poorer (often rural) customers. The wealth transfer trend could hold true for agent banking services, which would allow rural clients to save the money sent by their urban friends and leverage it for loans.
Bringing costs down is certainly still a good idea when thinking about micro-account administration. To do this, Staley says regulators should consider equal access to the delivery channel – i.e. mobile phones – and interoperability of agents. “Banks depend on the telcos for the channel, but we have competing products,” he said. Telecoms operators control the mobile network, which means banks must pay them for the communication costs on every agent transaction, whereas a telco offering a similar service does not have to pay a third party for the communication channel. And while banking agents can sign contracts with multiple banks, mobile money agents are exclusive. Therefore, with its 27,000 exclusive agents, Safaricom controls the bulk of the nation’s financial service points. By comparison, Kenya only has 1,700 ATMs. It will be a while before the banks can catch up to Safaricom through the spread of banking agents. With this in mind, interoperability – the use of agent infrastructure by multiple banks and telcos – makes sense.

However, Safaricom has invested vast amounts of time and money to build up its agent network. CBK had turned down a request by other mobile operators to force Safaricom to open up its system, arguing that the competition must display similar investment before they can use Safaricom’s network. In the meantime, partnerships like M-KESHO are a good way to integrate the systems and offer more convenience and access to customers. But there is a delicate balance: Safaricom is now looking at a scoring model based on airtime and M-PESA usage to add personal loans to its range of mobile services.

Agent banking may also grow in importance by expanding regional banking networks. Mobile money has been taken up in other countries, but has not yet achieved M-PESA success due to market share and demographic differences. It is also limited to domestic telco networks. Banks have a broader scope: Equity Bank and KCB both operate throughout East Africa and plan to extend their footprint through agency banking. “The regulators in Africa are really impressed by agency banking,” says Ndome. Southern Sudan will lag behind as the new state attempts to establish itself. But regulations are almost ready in Rwanda, and the Ugandan regulators were recently in Kenya studying how to roll out the model quickly back home.

There is still some skepticism regarding how well banks can manage risks remotely. Liability between the agent and bank must be well established and liquidity and credibility of the agent ensured, which means banks are keen to work with SACCOs and large well-known companies that have solid cash flows. The CBK regulations are also quite clear about the need for agent training and enforcement of anti-money laundering standards. The former in particular has been an enormous investment in building Safaricom’s extensive agent network, and monitoring and policing agents requires continuous efforts.

Will agency banking will be more successful in other countries than mobile money has been? Kenya is looking to Brazil, where agency banking has worked well. Similar schemes are coming up in Bolivia, Colombia, India, Mexico, Pakistan, Peru and South Africa. A truly functional system in East Africa may require shared infrastructure in order to achieve critical mass and ensure enough investment to attract customers and make them feel safe. Countries that do not already have a market leader like Safaricom would do well to consider this from the start. Technology will also be important, but perhaps less so than dedication by the banks to training, branding and marketing the service. This is likely to be similar to what drove the success of M-PESA: “You have to really want to do this,” says former Safaricom CEO Michael Joseph who had supervised and managed the roll-out of M-PESA p. “It’s a leap of faith. You need to have a passion for it.”

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